Eastern Air Lines v. Gulf Oil Corporation

1975 US District Court Southern District of Florida

• Gulf promised to sell all oil Eastern needs in certain locations in US at a price set by an index.
• Gulf’s defense is ‘lack of mutuality’ and ‘indefiniteness’. I.e., lack of consideration: Gulf is subject to Eastern’s whim, Eastern might not require anything, thus ‘their promise in return is illusory, doesn’t amount to anything.’
• But real reason Gulf wants to quit contract is because they don’t want to sell Eastern any oil at this price (rather than legal theory that Eastern might not buy any oil).
• Gulf instigated new ten year contract–even though old agreement was still valid–and Eastern agreed.
• “Requirements contract issue”
Example: oil supplier agrees to supply you with 60 gallons of home heating oil at $1.50/gallon, you later want to get out (oil prices drop) because lack of consideration. No likely possible defense.
• Similarly, if oil prices rise and supplier wants to get out, still no defense.
• Why set price in advance? Allocates risk.
• Risk: Degree of uncertainty
• Forward Contract: Contract for something in the future (vs. spot market, purchasing something now)
• If Eastern had contracted with Gulf for 10,000 gallons of oil per day at 12 specific locations at a specific price for ten years, there would be no defense of no consideration.
• Very unlikely that this sort of contract would ever exist, since conditions change over ten years, demand, price, business climate, etc., change, neither party would want to restrict themselves to this degree.
• What value of a 5 year contract? Requirements clause allows parties to commit to supplying required quantity over time. Increases certainty (even if it isn’t entirely certain).
• Since airplanes are flying from city to city, they could increase or decrease their demand on Gulf Oil depending on price of oil vs. fixed price agreed upon with Gulf.
• Price was based on Platts Oilgram report of West Texas Sour.
• Price controls were put on oil at the price of oil preceeding embargo.
• Argument against price control: doesn’t create incentive for finding new oil. Thus embargo was just on ‘old oil’, so there would still be incentive to find new oil.
• Picked baseline level of extraction pre-embargo to measure ‘old oil’. Anything above that would be ‘new oil’.
• Price at gas stations was ‘blended’ price, reflecting mixture of ‘old oil’ and ‘new oil’.
• West Texas Sour posting in Platts Oilgram continued at ‘old’ price, under price controls.
• Court was hostile to begin with, people this contract was initiated by Gulf. Bias in contracts towards interrupting contract against its author.
• Court is skeptical that events were entirely unforeseeable, given that there had already been a war and an embargo. Gulf could have protected itself against this possibility.
• Relational contract: lasts over long period of time, creates relationship between parties. Marriage contract is relational contract. Majority of contracts fall into this category, even where contract is terminable by one of the parties.
• Can also lead to vulnerabilities, since each side is invested in contract. Gulf may have expected Eastern to pay higher price because of relationship and Eastern’s investment in getting oil from Gulf. Enforcing contract probably cost millions of dollars in legal fees alone.
• More relational a contract is, the more the law sets up standards–duty to act in specific ways.
• Eastern’s duty: to set requirements in good faith.
• Uniform Commercial Code 2-306: Output, Requirements and Exclusive Dealings: ? A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
? Section 1-201, definitions that apply throughout UCC. Good faith is further defined in section 2-103, includes reasonable commercial standards of fair dealing in trade.
? 1-203 imposes good faith requirement on all sections.

Author: international